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Accounting Standard (AS) - 3
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Index
y Introduction
y Applicabilityy Definitionsy Cash and Cash equivalentsy Features of Cash Flow Statement
Operating Activities Investing Activities Financing Activities
y Interesty Dividendy Foreign Currency transactionsy Extraordinary items
y Treatment of Taxy Investments in subsidiaries, associates and joint venturesy Acquisitions and disposals of subsidiaries and other business unitsy Non-cash transactionsy Disclosures of cash and cash equivalents
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Introduction
y Cash flow statement is additional information to user offinancial statement
y This statement exhibits the flow of incoming and outgoing
cash
y This statement assesses the ability of the enterprise togenerate cash and cash equivalents
y It also assesses the needs of the enterprise to utilise thecash and cash equivalents generated
y It also assesses the liquidity and solvency of the enterprise.
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Applicability
Cash flow statement of listed companies shall
be presented only under the indirectmethod as prescribed in AS -3
This standard applies to the enterprises:
(i) All commercial, industrial and business
reporting enterprises, whose turnover forthe immediately preceding accountingperiod on the basis of audited financialstatements exceeds Rs. 50 crore. Turnover
does not include other income.
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(ii) All commercial, industrial andbusiness reporting enterprises
having borrowings, includingpublic deposits, in excess of Rs.10crore at any time during theaccounting period.
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(iii) Banks including co-operative banks.
(iv) Financial institutions.
(v) Enterprises carrying on insurancebusiness.
(vi) Enterprises whose equity or debt
securities are listed whether in India oroutside India.
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(vii)Enterprises which are in the processof listing their equity or debt securities
as evidenced by the board of directorsresolution in this regard.
(viii)Holding and subsidiary enterprises
of any one of the above at any timeduring the accounting period.
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Definitions
y Cash comprises cash on hand and demand deposits with banks.
y Cash equivalents are short term, highly liquid investments that arereadily convertible into known amounts of cash and which aresubject to an insignificant risk of changes in value.
y
Cash flows are inflows and outflows of cash and cash equivalents.
y Operating activities are the principal revenue-producing activitiesofthe enterprise and other activities that are not investing or
financing activities.
y Investing activities are the acquisition and disposal of long-termassets andother investments not included in cash equivalents.
y Financing activities are activities that result in changes in the sizeandcomposition of the owners capital (including preference sharecapital in the case of a company) and borrowings of the enterprise.
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Cash and Cash Equivalents
y Cash Equivalents Held for meeting short term commitments It is readily convertible into known amounts of cash It has a very insignificant risk Short maturity (say 3 months maximum)
y Cash flows excludeMovements between cash and cash equivalents
y Cash management includes the investment ofexcess cash in cash equivalents
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Features of Cash Flow Statement
y The cash flow statement should report cashflows during the period classified by Operating,
Investing and Financing activities.
y Sum of these three types of cash flow reflect net
increase or decrease of cash and cash equivalents.
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Operating Activities
y These are principal revenue producing activities ofthe enterprise.
y Examples: Cash receipts from sale of goods / rendering services;
Cash receipts from royalties, fees, commissions and otherrevenue;
Cash payments to suppliers of goods and service;
Cash payments to and on behalf of employees.
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Investment Activities
y The activities of acquisition and disposal of long term assets and otherinvestments not included in cash equivalent are investing activities.
y It includes making and collecting loans, acquiring and disposal of debtand equity instruments, property and fixed assets etc.
y Examples of cash flows arising from investing activities are as follows: Cash payments to acquire fixed assets
Cash receipts from disposal of fixed assets
Cash payments to acquire shares, warrants or debt instruments of otherenterprises and interest in joint ventures
Cash receipt from disposal of above investments
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Financing Activities
y Those activities that result in changes in size and composition ofowners capital and borrowing of the organization.
y It includes receipts from issuing shares, debentures, bonds, borrowingand payment of borrowed amount, loan etc.
Sale of share
Buy back of shares
Redemption of preference shares
Issue / redemption of debentures
Long term loan / payment thereof
Dividend / interest paid
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Cash flow from operating activities
y It can be derived either from direct method orindirect method
Direct method: In this method, gross receipts and gross payments of cash are
disclosed
Indirect method:
In this method, profit and loss account is adjusted for the effects oftransaction of non-cash nature.
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Interest
y Interest Received Received from investment it is in investment activities
Received from short term investment classified, as cash equivalentsshould be considered as cash inflows from operating activities.
Received on trade advances and operating receivables should be inoperating activities
y Interest Paid
On loans / debts are in financing activities
On working capital loan and any other loan taken to financeoperating activities are in operating activities
y
Cash flow from interest should be separately disclosed.
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Dividend
y Dividend Received
For financial enterprises in operating activities
For other than financial enterprises in investing activities
y Dividend Paid
Always classified as financing activities
y Cash flow from dividend should be separatelydisclosed
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Foreign currency transaction
y The effect of change in exchange rate in cash andcash equivalents held in foreign currency should bereported as separate part of the reconciliation of cash
and cash equivalents.
y Unrealized gain and losses arising from changes inforeign exchanges rates are not cash flows.
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Extraordinary items
yThe cash flows associated withextraordinary items should be classified
as arising from:Operating
Investing or
Financing activitiesas appropriate and separately disclosed.
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Treatment of tax
y Cash flow for tax payments / refund should beclassified as cash flow from operating activities.
y If cash flow can be specifically identified as cash flowfrom investment / financing activities, appropriateclassification should be made.
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Investments in subsidiaries, associates and joint
ventures
yOnly the cash flow between itselfand the investee is required to be
reportedyExample:
Cash flow relating to dividends andadvances
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su s ar es an o er us nessunits
Cash flow on acquisition and disposal of
subsidiaries and other business units
should be Presented separately :
Classified as investing activities
Total purchase and disposal should be
disclosed separately
The position of the purchase / disposal
consideration discharged by means of
cash and cash equivalents should be
disclosed
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Non-cash transactions
y These should be excluded from the cash flowstatement
y These transactions should be disclosed in thefinancial statements.
y Examples
Acquisition of assets by assuming directlyrelated liabilities
Acquisition of an enterprise by means of issueof equity sshares
Conversion of debt to equity
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sc osures o cas an casequivalents
y The components of cash and cash equivalents shouldbe disclosed
y Reconciliation of the amount in the cash flowstatement with the equivalent items reported in the
balance sheet
y The amount of cash and cash equivalent balance heldby the enterprises that are not available for use (withexplanation by management)
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y ITEMS GENERALLY APPRARING INyTHE CASH FLOWSTATEMENTOF
BANKS :
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A. CASH FLOWFROMOPERTAINGACTIVITIES:
yNet Profit Before Tax
I. Adjustments for :
Depreciation for fixed assets
Depreciation on investments
Provisions in respect of NPA/Bad Debts
Provisions on Standard Assets
Provisions for other items
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Profit/Loss on sale of fixed assets
Dividend received from subsidiaries/others
Payment /provision for interest (other debts)II. Adjustment for :
Increase/(Decrease) in Deposits
Increase/ (Decrease) in BorrowingIncrease/(Decrease) in other liabilities &
provisions
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(Increase)/Decrease in Advances
(Increase) / Decrease in Investments
(Increase)/Decrease in Other Assets(Direct Taxes paid)/ Refund
Net Cash Flow From
Operating Activities-
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B.CASH FLOWFROMINVESTINGACTIVITIES :
sale/Disposal of Fixed Assets
Purchase of Fixed Assets
Income from subsidiaries & associates
Investment in Subsidiaries and/JointVentures
Net cash Flow From Investment Activities.
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C.CASH FLOWFROM FINANCING ACTIVITIES:Equity Capital Raised
Subordinated debts raised
Subordinated debts repaidPremium on equity capital raised
Dividend Paid
Interest on Long Term Loan/Subord.
Debts
Net Cash Flow From Financing Activities
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D. Net increase/decrease in cash & cash
equivalents (A+B+C)
a. Cash & Cash Equivalents (Opening)b. Cash & Cash Equivalents (Closing )
E. Difference in opening & closing (a-b)
D= E